Should You Worry About Rising Bond Yields?

2015 hasn’t been a great year for bonds. While US stocks have returned more than 4% since the start of the year and international stocks have done even better, US investment grade bonds are essentially flat. And in the last few months they’ve actually lost money as bond yields have risen (yields move in the opposite direction of prices, so bonds lose value when their yields rise). Is this the start of a surge in bond yields, or simply a short-term blip?

To answer that question, the first thing to note is that the recent rise in yields (at least for US bonds) hasn’t been especially dramatic. The yield on 10-year US government bonds has risen from below 1.7% at the start of February to over 2.2% this week. That increase pales in comparison to the jump from around 2% to around 4% in 2009 and the increase from 1.7% to around 3% in the summer of 2013.

The lack of a clear economic explanation suggests that the recent rise in bond yields is likely more of a short-term blip than the start of a larger trend. For investors who are concerned about a continued rise in yields, one way to reduce risk without decimating your asset allocation is to shift your bond holdings toward shorter-term bonds. But bond yields can stay low for a long time, and there’s no economic evidence that the era of very low bond yields has ended.